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Methodist Health Services Corp. v. OSF Healthcare System

United States District Court, C.D. Illinois, Peoria Division

September 30, 2016

OSF HEALTHCARE SYSTEM, an Illinois not-for-profit corporation d/b/a SAINT FRANCIS MEDICAL CENTER, Defendant.



         Two hospitals dominate the market for inpatient medical services in Peoria, Illinois. One, St. Francis, is about twice as big as the other, Methodist.[1] St. Francis offers many high-end services that neither Methodist nor any other hospital in Peoria offer, such as sophisticated pediatric care and solid organ transplants. Methodist sued St. Francis because St. Francis has entered into contracts with some commercial health insurance companies that require those insurers to exclude Methodist from the insurers' provider networks. St. Francis' exclusive contracts violate federal antitrust law, Methodist has alleged, because they unreasonably restrain trade by substantially foreclosing Methodist's ability to compete for commercially insured patients' business, which is far more profitable for a hospital than business from publicly insured patients. St. Francis has moved for summary judgment on all claims. The motion is GRANTED.[2]


         1. Facts

         a. General overview of healthcare delivery and payment

         This is an antitrust case about the provision of healthcare by and payment to various hospitals in Peoria. Some background on the way health insurance works, broadly speaking, is necessary to understand the legal claims asserted and this motion's resolution. The hospitals are called providers and the entities that pay for the healthcare, usually either private or public insurers, are called payers.

         At the most general level, providers recoup their costs in one of three ways-they bill the government if the patient is covered by public insurance (Medicare or Medicaid, for example); they bill an insurance company if the patient is covered by private insurance; or they bill the patient directly if he is not insured. More people are covered by government health insurance than by commercial health insurance, and uninsured people make up a very small slice of the overall market.[3]

         The evidence in the record suggests that patients covered by government insurance are not profitable for hospitals; several executives testified that payment for services provided to those patients do not cover the hospitals' costs. The ratio of patients covered by government insurance to patients covered by commercial insurance is called a payer mix. Providers strongly prefer a payer mix that includes a higher proportion of commercially insured patients.

         Commercial insurance companies, typically large national firms, sell managed care plans to employers or individual consumers. Those plans can take several forms, but in this case the only two kinds that matter are called preferred provider organizations (“PPO”) and health maintenance organizations (“HMO”). The major differences are that HMOs are usually cheaper but more restrictive to the end user. PPOs can be further classified into two broad groups: self-insured and fully funded. In a fully funded insurance plan, the payer (the commercial insurer) administers the plan and also bears the cost of the healthcare provided to the insureds. In a self-insured plan, also called an administrative services only plan (“ASO”), an employer, usually a large one, contracts with the payer to deal with the providers but bears the cost of healthcare provided to the plan's members.

         The content of a health insurance plan is dictated by contracts made between providers and payers. Those parties dicker over terms such as duration and price of services. Another important term addresses the provider network. From a patient's point of view, a provider network lists the providers they can visit and receive lower prices for medical services, as compared to prices charged by out-of-network providers. The fight in this case arises out of terms dealing with network exclusivity. Network exclusivity in a health insurance plan refers to the network's breadth. A plan has a broad, or open, network if a patient can visit many different providers and still receive a favorable rate. A plan has a narrow network if a patient may receive favorable rates at only one or few providers. The use of networks creates obvious incentives for commercial insurers to funnel their insureds (via other incentives, like deductibles and co-pays) toward in-network providers.

         A simple exclusivity clause might look like this: in return for a lower rate on services at hospital X, payer Y may not include hospital Z in its plans' networks. Providers generally offer payers lower rates in return for network exclusivity. Conversely, if a payer wants to offer a broader network to its customers (that is, employers or individual purchasers of health insurance), it typically must agree to pay higher rates to providers. The parties and literature refer to the pricing difference between broad and narrow networks as an open-network premium. Providers want narrow networks because even though the prices they charge to commercially insured patients will be relatively lower, the incentives created by the network pricing structure will increase commercially insured patient volume. Payers usually seek broader networks, as long as the prices are not too high, because their customers value flexibility when making decisions regarding healthcare.

         In this case, the evidence tends to show that St. Francis strongly favors exclusivity when bargaining with payers. Exclusivity has many benefits to a provider, and the evidence suggests St. Francis thought that predictability of commercial inpatient volume was very important given several of its long term capital investments. In particular, it does not want payers to include Methodist in any network that also includes St. Francis, other things being equal. Methodist also has several exclusive contracts, but they are all many times smaller than St. Francis' largest exclusive contract. Both hospitals' networks will be discussed in greater detail below.

         b. The healthcare market in Peoria

         There are six hospitals in the geographic area relevant to this case.[4] St. Francis is the biggest, it has 616 beds. Methodist is the second largest, it has 330 beds. Proctor hospital is third largest with 220 beds.[5] There are three other hospitals in the area: Pekin (107 beds); Eureka (25 beds); and Hopedale (25 beds). Methodist and St. Francis are located very close to one another-they are separated by less than a quarter mile.

         In addition to being the largest, St. Francis is by far the most advanced hospital in the area. It is the only Peoria hospital that can perform solid organ transplants; it is the only Peoria hospital that has the highest level of trauma care; it is the only Peoria hospital with a neonatal intensive care unit; and its pediatric unit is far more extensive and advanced than the other hospitals'. That pediatric unit includes the Children's Hospital of Illinois, and it amounts to 136 of St. Francis' beds. St. Francis is also a teaching hospital (generally a boon for physician recruitment). According to Methodist's expert's report, “18.3% of [St. Francis'] commercial inpatient days are attributable to inpatient services for which” St. Francis is the exclusive or near-exclusive provider. See Capps Report ¶¶ 105-108, MSJ Ex. 74, ECF No. 146-14. Beyond those services for which St. Francis is the exclusive provider in the geographic region St. Francis and Methodist are relatively fungible, although some of the evidence suggests Methodist has higher quality of care metrics than St. Francis. The evidence also shows that, other things equal, people prefer to get medical care locally; if a cardiac patient from Peoria can undergo the same procedure in Peoria as in Chicago, she will likely get it done in Peoria.

         Many of the familiar major national health insurance companies offer products in the Peoria market. They include Blue Cross Blue Shield; Humana; Coventry; Aetna; and some others. Peoria's commercial health care market has a quirk-the second largest source of commercially insured patients is Caterpillar, the area's largest employer, rather than from a health insurer. Caterpillar employees primarily use an ASO PPO.

         c. St. Francis' exclusive contracts

         This litigation arises out of several contracts that have exclusivity provisions that favor St. Francis. The first three are between St. Francis and different commercial insurers and the last dealt with the health care for Caterpillar employees.

         1.Blue Cross Blue Shield

         Blue Cross Blue Shield (“BCBS”) is the largest and most important commercial insurer in the market. It offers two products relevant to this case: a PPO and an HMO. The PPO has been exclusive to St. Francis since 2002. The HMO is exclusive to Methodist.[6]

         The BCBS PPO is roughly twenty times larger than the BCBS HMO. Capps Report ¶ 118. The BCBS PPO accounted for 32 percent of all admissions and 34 percent of all payments at St. Francis and Methodist, combined, in 2012. Capps Report 54 Fig. 17.[7] The BCBS PPO is by far the largest commercial plan in the market. The same figures for the BCBS HMO are 1.6 and 2.1 percent. St. Francis derives 39 percent of its commercial inpatient revenue from the BCBS PPO.

         A contract from 1982 between Methodist and BCBS governs the out-of-network pricing for BCBS PPO plan members who are treated at Methodist; when Methodist treats BCBS PPO plan members, it is reimbursed by BCBS under the terms of the 1982 contract. Methodist has since 2006 operated a matching program, pursuant to which it waives all charges to out-of-network commercially insured patients above what those patients would pay if they received the same services at St. Francis. See Capps Report ¶ 545. The effect of the matching program is that care received out of network at Methodist is not more expensive to BCBS PPO insureds than care received in network at St. Francis-in theory it removes the patient's incentive to visit St. Francis at the expense of Methodist. Methodist actively marketed its matching program. Methodist's revenues from BCBS PPO patients grew steadily (between 5 and 10 percent per year) since the program's implementation, and in 2010 resulted in $40 million in revenue. To put that figure into perspective, Methodist's total operating revenue for 2013 was $380 million.

         2. Humana

         Humana is the second largest commercial insurer in the area-it accounted for 13 percent of commercial admissions and 10 percent of commercial payments in 2012. Humana's network does not include Methodist.

         Humana became a major player in the Peoria market when it acquired what used to be OSF's commercial health insurance business. OSF (St. Francis' parent) conditioned the transaction on Humana keeping St. Francis as the exclusive in-network provider. A shade under 20 percent of the Humana covered lives, about 20, 000 at the time of the 2008 acquisition, are OSF employees (OSF is the second largest Peoria area employer). In return for exclusivity, Humana receives favorable rates-it is the beneficiary of what in the industry is known as “most favored nation” status (MFN).

         3. Health Alliance

         Health Alliance Medical Plans (“HAMP”) accounts for 5 percent of commercial inpatient admissions and 6 percent of commercial payments in the market. The relevant HAMP plan is an HMO. HAMP used to be affiliated with a standalone regional clinic called the Carle Clinic Association. In 2009, OSF purchased one of the Carle Clinic locations (in Bloomington, Illinois), and in connection with that transaction HAMP agreed to an exclusive provider agreement with St. Francis. Before the acquisition, OSF was not an in-network provider for HAMP, but Methodist was.

         HAMP and Carle Clinic have a strong link-“30 or 40” percent of the clinic's patients were insured by HAMP. The overwhelming majority of HAMP patients had Carle physicians as their primary care physician, with the remainder assigned to Methodist physicians. Once OSF bought the clinic, a conflict emerged from St. Francis' point of view: most of the doctors at the clinic were aligned with an insurer that dealt with Methodist. Further, OSF brought the Carle doctors into its physician group in fall of 2009.

         Methodist contends that HAMP signed an exclusive contract with St. Francis under coercion from St. Francis. St. Francis argues that the reason HAMP switched providers is that Methodist failed to accept a risk sharing clause as part of a renewed contract, but that St. Francis did, in fact, agree to the risk-sharing aspect of the contract. The evidence is disputed on the point, that is, a jury could conclude HAMP entered the exclusive contract under pressure from St. Francis or due to Methodist's failure to accept a share of HAMP's risk.

         4. Other St. Francis exclusive payers

         The lone remaining exclusive payer in this case is Aetna. Aetna only amounts to a little over 1 percent of the market.

         d. Caterpillar[8]

         Caterpillar's health plans have changed significantly over the past several years, though they have been mostly self-insured for all the years relevant to this litigation. Up until 2010, Caterpillar offered its employees a self-insured PPO administered by United. The PPO was a St. Francis exclusive network, and had been since at least 2001 pursuant to a long term contract. In 2009, Caterpillar also began to offer its employees a fully-insured HMO from HAMP. The HMO was a Methodist exclusive. The PPO was far more popular with Caterpillar workers.

         In 2010, Caterpillar decided to move away from exclusive networks. Following what the evidence suggests were protracted negotiations, Caterpillar decoupled the services that only St. Francis could provide with those that overlapped with Methodist's capabilities, and opened its PPO network up to include both hospitals. In 2011, the Caterpillar HMO network opened up to include both hospitals as well. For the years 2005 through 2009, for every one Caterpillar insured admitted to Methodist, 44 were admitted to St. Francis. Following the opening of the network, that is, for the years 2010 through 2013, for every Caterpillar inpatient admitted to Methodist there were 5.4 admitted to St. Francis. (For example, in 2012 there were 1, 737 Caterpillar patients at St. Francis and 351 Caterpillar patients at Methodist. In 2008 the numbers were 2, 986 and 79.)

         Caterpillar paid to open the networks. That is, it lost the discount it enjoyed when St. Francis was the exclusive provider for the PPO. There was a 38 percent price increase of St. Francis' unique-to-Peoria services (the so-called tertiary services), and a general 3.7 percent price increase for non-tertiary inpatient services.[9]

         e. Market foreclosure

         Methodist hired an economist named Cory Capps to write a report showing that St. Francis' exclusive contracts have substantially foreclosed Methodist from competing in the market for commercially insured patients in and around Peoria. Among other things, Capps' report offers a quantification of the total percentage foreclosure for two years, 2009 and 2012.

         In 2009, according to Capps, 54 percent of the market was foreclosed by three commercial plans that excluded Methodist from their provider network: the BCBS PPO; the Caterpillar PPO; and the Humana plan (formerly OSF's plan). And in 2012, Capps' figure was similar: 52 percent, based on the exclusivity found in the BCBS PPO; the Humana plan; the HAMP plan; and the very small Aetna plan (Caterpillar had by then opened its network).

         2. Methodist's legal claims

         Methodist filed a nine-count complaint against St. Francis that alleges three federal antitrust claims and six claims arising under Illinois law. The antitrust claims assert violations of both sections of the Sherman Act. They contend that St. Francis' exclusive dealing has unreasonably restrained trade; that St. Francis has unlawfully maintained monopoly power; and that St. Francis has sought monopoly power through unlawful means.

         The basis of Methodist's claims is St. Francis' exclusive contracts. Methodist alleged that St. Francis wielded market power because it is the only area hospital that provides certain essential services and was therefore what is known in the healthcare industry as a must-have hospital. It used that market power, according to Methodist, to coerce commercial payers into excluding Methodist from their provider networks and to pay greater than competitive rates by threatening to withdraw from the payers networks, thus making the payers' products less competitive in their marketplace. See Compl. ¶¶ 58-63, ECF No. 1.

         3. St. Francis' motion for summary judgment and Methodist's response

         St. Francis has filed a motion for summary judgment on all claims. As to the federal antitrust claims, St. Francis contends that its exclusive contracts with commercial payers do not substantially foreclose Methodist from competing for commercial patients and because, as explained in greater detail below, substantial foreclosure of competition in the market is one of the major legal issues in this case, the antitrust claims fail as a matter of law. St. Francis concedes that it exercises market power for purposes of its summary judgment motion, and makes several related arguments that directly address Methodist's Sherman Act claims.

         First, it contends Methodist was not substantially foreclosed from the market for commercially insured patients in Peoria because, in essence, the market was functioning properly. In support of this first argument, St. Francis (1) highlights Methodist's “alternative distribution channels, ” including the commercial health plans for which Methodist was in network; and (2) points out that many Peoria employers offer their employees a choice between a St. Francis exclusive plan and a Methodist exclusive plan, meaning the exclusive contracts do not prevent employees from choosing Methodist. Next, St. Francis highlights Methodist's match program. If a BCBS PPO member had a choice between the two hospitals and price was not a factor, then the exclusive contract could not have unfairly foreclosed competition, according to St. Francis.[10] Finally, St. Francis makes what is in essence an embedded Daubert motion; it goes through Capps' report line by line and identifies purported errors in his calculation of the rate of foreclosure. The assault on Capps' arithmetic is made up of five distinct points, which the Court will address in turn below. As a throwaway argument (subheading “6”), St. Francis claims no foreclosure exists because Methodist has been able to compete for all the relevant exclusive contracts.

         St. Francis' foreclosure arguments, therefore, are distinct but related-first it contends that Methodist is able to compete at some level for every commercially insured patient in the market, but even if it is not able to compete, Capps' foreclosure calculation falls far below the threshold established by case law to make out substantial foreclosure. The summary judgment motion then focuses on the outpatient market claim. St. Francis states that there is an “obvious failure of proof” because Capps did not perform a separate analysis for the outpatient market; instead he assumed the market dynamics were identical as those for the inpatient market.

         Separate from its arguments related to substantial foreclosure, St. Francis asserts that Methodist cannot prove an antitrust injury. Antitrust injury is injury to competition, like higher prices or poorer quality, injury to a competitor does not satisfy the requirement. Because antitrust injury is an essential component of a Sherman Act claim, summary judgment is appropriate. Finally, St. Francis argues that the product market in this case (a threshold inquiry in any antitrust case) should encompass both commercial and government patients. If the evidence supports such a broad product market, as opposed to one that includes only commercial payments, then the claims fail.

         Methodist disagrees. First, Methodist addresses the arguments related to substantial foreclosure. It asserts that it was not, in fact, able to compete for the BCBS PPO contract because of St. Francis' exercise of market power. It argues that the alternative distribution channels identified by St. Francis are not, in fact, adequate. And it finally responds to the attack on Capps' report. Methodist also points to several facts that it contends are sufficient to ...

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